22 January 2016 — A few days ago, economic sanctions against Iran that had existed for decades were removed. So, Iran is no longer a global geopolitical pariah. But that doesn’t mean Iran is about to become everyone’s best friend.

With the sanctions removed, Iran is now able to sell more of its oil to the rest of the world. This will not help the price of oil – which has already fallen 72 per cent from the highs it reached in 2014.

Low oil prices are great for countries like Singapore, Thailand, India and China because they need to import oil to meet demand. With low oil prices, inflation is lower and economic growth is stronger.

But low oil prices have the opposite effect (except for inflation) on big oil exporters, like Brazil, Russia, Saudi Arabia and even Malaysia. With lower oil prices, their economies and currencies really suffer.

On Monday, the Financial Times wrote, “Iran announced its full return to the global oil market by ordering an immediate increase in production, prompting warnings from fellow OPEC members that it risks prolonging the biggest price crash in a decade.

Brent crude, the international oil benchmark, fell below $28 a barrel for the first time since 2003, as Iranian tankers loaded with 50 million barrels of crude prepared to set sail following the lifting of US and EU sanctions.

Marking the end of years of economic isolation, the head of Iran’s national oil company gave the instruction to increase output by about 500,000 barrels a day…”

With demand for oil growing at a slower pace than the supply of oil, prices continue to decline. The amount of extra supply really is not that much – only about 2 percent more than the demand. But that is enough to be a major drag on oil prices. With Iran about to add another 0.5 percent to the world’s total daily oil production, the supply of oil is only going to grow. On Tuesday, the International Energy Agency said oil markets could “drown in oversupply.”

Iran is not interested in the world’s excess oil supply problems. No one else seems to be either, including the former OPEC oil cartel. And Iran has three very good reasons to pump as much oil as it can:

It needs the money. Iran’s infrastructure – roads, buildings, bridges – are in bad shape. Pollution is bad and getting worse. And its economy and currency are struggling. They need money to fix all of this.

Iranians want more stuff. With enough money and connections, you could always get what you wanted in Iran. But the average Iranian has not been able to get their hands on the clothes, gadgets, food and cars the rest of the world has access to. With sanctions lifted, some of that will be available, but they’ll need money to buy it.

The leaders want more money. In 2013, an investigation by Reuters discovered that Ali Khamenei, Iran’s supreme leader – part holy man, part dictator-for-life – controlled a business empire worth US$95 billion. The supreme leader and the entire political class need money to maintain their opulent lifestyles. The money to keep the corruption profitable comes from oil.

Only Venezuela, Saudi Arabia and Canada have more oil than Iran. Iran has more oil than Kuwait and Libya put together. So, the easiest way for Iran to make money quickly is to pump more oil.

The supply and demand for oil will one day reach equilibrium. But with Iran soon to add more supply, that time will come later rather than sooner.

Investors’ Takeaway; Stay Away from Oil & Related Industries
Despite oil prices dipping to such low levels, it is still possible that prices will continue to plunge, especially when the supply glut continues to grow. In the near to mid-term, investors can expect oil prices to stay soft and related industries like offshore and marine to be affected. Volatility will persist until the supply glut problem is solved, which brings us to the biggest question: when?
*Kim Iskyan – Yahoo